UPS Q1 Earnings: Growth In All Segments, Margins Remain A Concern

UPS (NYSE:UPS) announced healthy Q1 earnings on Thursday, April 27. For the quarter ending March 31, the company posted revenues of $15.3 billion, an increase of 6% over the prior year quarter. Additionally, the company comfortably beat the $15.1 billion it had been expected to post in revenue, based on the consensus estimates compiled by Reuters. The uptick in revenues was driven by an increase in average daily package volumes, which increased 3% and 12% over the prior year quarter for U.S. Domestic Package and International Package, respectively, and strong performance of Supply Chain and Freight segment. However, the company’s expenses outpaced its revenue growth, leading to a decline in the company’s margins. Increased transportation expenses, as well as higher fuel and compensation expenses were primarily responsible for the decline in the company’s margins, which dipped 110 basis points over the prior year quarter to 11.6%. The company’s net income was $1.16 billion, an increase of 2% over the same period last year, while EPS grew 4% over the same period last year to $1.32, 3 cents higher than the analysts’ estimates compiled by Reuters. In view of its performance in the current quarter, the company expects to match its earlier stated full year earnings guidance of $5.80 to $6.10 per share.

The U.S. Domestic Package segment, UPS’s main revenue contributor, continues to benefit from growth in the e-commerce sector, with B2C deliveries increasing 7%. [1] For the quarter ending March, the segment’s revenue increased 5% over the prior year quarter to $9.5 billion, primarily aided by a 2.6% increase in average daily package volume. Within the segment, U.S. Deferred Packages showed the most growth, with its average daily package volume increasing 4% over the same period last year to 1.2 million. Next Day Air’s average daily package volume grew slightly less than 4% over the prior year quarter to 1.3 million and Ground shipments surged 2% over the same period last year to 13 million. However, the increased cost of shipping coupled with the ongoing expansions resulted in the segment’s profit declining 2% over the same period last year, to $1.1 billion.

The International Package segment’s revenues grew 5% year over year (y-o-y) to over $3 billion for the quarter, aided by a 12% rise in average daily package volume. Additionally, in order to improve its facilities in Asia and Europe, the company undertook a host of measures such as reducing the shipping time by one day across Europe. These improvement measures, along with currency headwinds resulted in the company’s operating margin declining almost 2.5 percentage points y-o-y to 17.3%. On a constant currency basis, the company reported operating profit of $648 million, an increase of 13% over the prior year period.

Going forward, UPS expects to expand its existing facilities in order to cater to the ever growing needs of the e-commerce segment. The expansion plans are already underway in more than 17 facilities and the company has similar plans for international markets. The company’s capital spending for the quarter was $938 million. For the full year, UPS plans to keep its capital expenditures as a percentage of revenues in the range of 6-7%.

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